Going public: Why Shopify's shares matter

Ottawa’s latest tech star — a burgeoning software empire called Shopify — is set to begin issuing shares to the public.

The TSX and New York Stock Exchange Wednesday conditionally approved the listing of 7.7 million shares, which are being offered at $17 US — higher than expected. Trading could begin May 21.

It’s the clearest sign possible that you can build successful high-tech firms in the National Capital Region — and this means investors are once more giving Ottawa-Gatineau a second look.

Eight years ago, Shopify founder Tobias Lütke and his fellow entrepreneurs were generating a few thousand dollars a month selling snowboards over the Internet. Their headquarters was a small space above a Bridgehead coffee house on Elgin Street — a location that allowed the cash-strapped firm to pinch Wi-Fi signals.

Today, a good chunk of Shopify’s 630-plus employees operate out of a stunning new tower on the same street. The company last year recorded sales of $105 million US — none of it involving snowboards. Lütke and his founders determined the best way to make money was to license software that allows other entrepreneurs and retailers to build electronic storefronts.

Shopify hit a sweet spot. More than 160,000 merchants in 150 countries rely on its software, sold through monthly subscriptions. During Shopify’s most recent quarter, ended March 31, revenues were running at an annual rate of $150 million US.

Although the company is still gushing serious losses — about $22.3 million US last year — it is the growth potential that has investors excited.

With approval from the TSX and NYSE a virtual certainty, Shopify expects to raise $130.9 million U.S. which would be used to further expand the company’s operations and software offerings.

This would be the region’s largest initial public offering since 2010, when Mitel raked in $147 million US. It would also exceed the $124 million US initial public offering in 1998 by Entrust Technologies — which executed the region’s richest IPO during the tech boom.

At $17 US per share, Shopify will have a value of nearly $1.3 billion US — more than that of Mitel Networks, until now the region’s richest in terms of market capital.

Shopify’s IPO seems likely to serve as an important catalyst for new startups in the region. No fewer than five venture capital firms invested heavily in Lütke’s firm — and all will do very nicely.

Bessemer — for decades a Silicon Valley beacon for entrepreneurs — and FirstMark Capital of New York contributed the most to Shopify’s equity. They own 20.2 million and 7.9 million shares, respectively. It’s not known what they paid for their equity, but the average price paid by all of Shopify’s current shareholders was just $1.34 per share.

Bessemer, FirstMark and other venture firms will have no trouble with the idea of returning phone calls from other Ottawa startups.

The IPO will also make wealthy men of founders Lütke, Daniel Weinand and Cody Fauser. Hundreds of Shopify employees will benefit. Lütke owns nearly 10 million shares, while Weinand and Fauser hold more than 1.3 million each. This is potential seed capital for entrepreneurial colleagues.

Shopify’s early success is a good reminder that — despite the bursting of the late 1990s telecom bubble — the National Capital Region remains Canada’s most technology-intensive city. Last year, eight per cent of the region’s workforce was high-tech — by far the highest among Canada’s 35 largest cities. Kitchener-Waterloo and Toronto were next at 5.8 per cent and 5.4 per cent, respectively.

Our lead in the past few months has been slipping somewhat, which is why a catalyst from Shopify is timely. Overall, high-tech employment in Ottawa-Gatineau has dropped about 8,000 since hitting a recent peak last summer of 56,700. (This, according to Statistics Canada — based on a 12-month moving average, rather than the extremely volatile three-month average usually published by the agency.)

Related

It’s not clear what’s driving the recent decline, but it may be temporary. Shopify’s IPO is just the latest in a string of IPOs since Mitel returned to the stock market five years ago. Halogen Software and Kinaxis raised $55 million and $100 million Cdn, respectively — and have been adding customers and employees at a fast clip. Tweed Inc. and other firms have started trading on the TSX Venture exchange.

What’s reassuring is the diversity. Halogen markets human resources software globally to more than 2,100 customers while Kinaxis — the latest version of a tech pioneer that has undergone several name changes (Carp Systems International and WebPlan among them) — makes software that helps companies track inventories electronically.

Kinaxis has done the best out of the IPO gate. Its share price has more than doubled over the past year as the firm has consistently delivered strong revenue growth and improved profits. The Kanata firm’s market value recently topped $700 million Cdn.

While Mitel’s shares are down about 35 per cent since its 2010 IPO, the company’s CEO, Rich McBee, has recently orchestrated a string of acquisitions en route to building a $1.2 billion US-a-year global concern. Its sales and earnings are recovering smartly.

There’s much that can go wrong following Shopify’s IPO. It’s just the nature of high tech. But if Lütke and his colleagues get the formula right, they could very well create a flagship firm capable of spinning off cash and entrepreneurs for years to come.

Certainly that’s how Lütke saw his role when he told the Citizen a little more than three years ago: “I want to build one of Canada’s greatest success stories,” he says. “That’s been my goal for a very long time.”

He’s still a long way from achieving it. But he’s getting closer by the day.

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